Solid Negotiation Skills Have an Impact on Health Plan Terms

Negotiation Skills: Impact on Health Plan Terms

A clear sense of current market trends, cost of care, and demonstrated efficiencies that reduce cost are essential elements of contract negotiation preparations.

Negotiation leverage, in terms of hospital control, comes from several sources. The most recognized driver is market power based on geographical area or demographic factors. However, hospital/payer relationships, service offerings needed in the community, and negotiation skill and/or negotiation philosophy are other important drivers. Over the last five years, the United States is estimated to have spent more than $900 bil- lion on hospital care in each year, of which more than $300 billion is paid by private health plans. The Centers for Medicare and Medicaid Services (CMS) estimate that through 2023, hospital care spending will continue to increase almost six percent each year (National Health Expenditure Data, Centers for Medicare & Medicaid Services, Vol. 2017).

Most U.S. hospitals use commercial health plan payments to offset losses from govern- mental payers and uninsured patients. Negotiated health plan amounts are complicated and complex. Even if the provider demonstrates efficient operations, net revenue is at stake without properly negotiated payer contracts. With so much at stake, hospitals and health systems should consider the following questions:
> Can human proficiency, ability, and interaction during negotiations have a greater influence than geographical location and hospital market power?
> If hospitals are in the same market, can competing hospitals achieve the levels necessary to survive without skilled negotiators?
> Are negotiation skill, style, and philosophy strong drivers in achieving desired payment rates during contract negotiation encounters?

A Comparison of Two Hospitals

Examining two hospitals in the same market can help providers understand differences in market position and overall favorability of payment terms. The comparison of relative market position and payer mix involves data sources from audited financial statements and survey forms, publicly filed Medicare Cost Reports, or publicly filed data for Medicare inpatient and outpatient claims.
For market share, Hospital A controls almost 59 percent of the market where Hospital B about 33 percent. Hospital A has lower percent levels of Medicaid charges and lower percent levels of uncompensated care. Hospital A shows a higher percent of non-governmental payers at 35 per- cent, whereas, Hospital B is 31 percent non-governmental. The comparison
indicates Hospital A has a superior market position over Hospital B. However, while other factors indicate Hospital A appears to have more market power, Hospital A has a lower Net Patient Revenue per Equivalent DischargeTM, which suggests Hospital A has lower levels of commercial health plan payments (see the exhibit below).

Comparison of Terms of the Same Major Payer for Hospital A and Hospital B
Facility Hospital A Hospital B
Payer Major Health plan Major Health Plan
Effective Date Jan. 1, 2018 Jan. 1, 2018
INPATIENT SERVICES General
MS-DRG base rate $26,372 $20,016
Inpatient threshold Total charges >

$268,194

Total charges >

$178,643

1st dollar 51.82% 57.93%
 

OUTPATIENT SERVICES

Outpatient surgery
Multiple procedure discount 1st = 100%, 2nd and beyond = 50%
Outpatient surgery (% billing charges) 40.53%
Outpatient surgery group 1-case rate $1,284.29
Outpatient surgery group 2-case rate $1,724.73
Outpatient surgery group 3-case rate $1,971.71
Outpatient surgery group 4-case rate $2,432.73
Outpatient surgery group 5-case rate $2,774.39
Outpatient surgery group 6-case rate $3,231.30
Outpatient surgery group 7-case rate $3,848.74
Outpatient surgery group 8-case rate $3,799.34
Outpatient surgery group 9-case rate $13,583.79
Outpatient surgery ungroupable (% billed charges) 40.53% 53.65%
Emergency Department
Emergency department (% billed charges) 51.15% 53.65%
Other
All other outpatient (% billed charges)             44.39%                     53.65%

After examination, the comparison represents considerable base term differences where the methodology is the same. However, on the surface for inpatient terms, the figures alone without investigation could be misjudged. While the MS-DRG base rate appears more favorable for Hospital A with a base rate of almost 32 percent higher, a key term to consider is the outlier/stop-loss provision. Notice Hospital A includes a much higher thresh- old at almost 50 percent higher, and once met, a lower percent of billed charges paid. With both hospitals reporting high charge structures, the inpatient terms for Hospital B may be more favorable.

On the outpatient side, where methodology is the same, Hospital B appears to have more favorable terms with a higher percent of charges paid for emergency department and all other outpatient services. Where methodology differs (i.e., fixed rate versus variable rate) in outpatient surgery, cur- rent charge practices and utilization data would be required to determine payment differences.

While Hospital A has greater market share, Hospital B shows negotiations produced more favorable terms from the major health plan. Such comparisons indicate negotiation skills, style, and philosophy may represent controlling drivers. So how can hospitals use these human factors to aid in developing contracts with the most favorable terms for the hospital?

Negotiation Skills for Healthcare Professionals

Negotiation involves reaching an agreement on payment terms through discussion and compromise. Negotiation skills require communicating an engaging vision, advocating services, and convincing others to align efforts and support the common objective (Fernandez, C. S. P., and Roberts, D., “Strengthening Negotiation Skills,Part I.” Journal of Public Health Management and Practice, 21(2), 214–216). Several strategies impact negotiations. Prior to the actual negotiating stage is a period of influence. The period of influence includes five major sources of power: knowledge, attitude, authority, objectivity, and negotiation skills (Fernandez, C. S. P., and Roberts, D., “Strengthening Negotiation Skills, Part II.” Journal of Public Health Management and Practice, 21(3), 304–307).

Knowledge. Knowledge involves two separate elements; insight data and an individual’s technical knowledge reserve. Insight data includes understanding the provider’s payer mix, pinpointing costs of providing each procedure potentially negotiated, knowing the provider com- petition, and using market intelligence (Rizzo, E., “Best Tips on Negotiating With Payers: Administrators Speak Up,” Becker’s Healthcare: ASC Review, 1–8).

Market intelligence requires researching other similar providers’ operational statistics to understand internal strengths and barriers to success (Boyd, D., & Finman, L., Managed care: mastering the moving parts. hfm, Healthcare Financial Management Association, May 2010). A healthcare professional individual’s technical reserve of knowledge is heightened through the skill of asking questions. Being prepared to ask questions during negotiations is a critical element in gathering information.

Attitude. Attitude refers to strength and relevance of the need and value of the solution (Fernandez and Roberts, Part II).

Authority. Authority can influence negotiations from authority perspectives such as title or higher management level. Authority can also influence negotiations from a positive perceived perspective by
knowledge or expertise, by connections and relationships, or as a result of soft skills and emotional intelligence (Fernandez and Roberts, Part II).

Objectivity. Using benchmarking data, planning alternative solutions, and formulating a compelling argument to the terms to be negotiated all lead to objectivity.

Negotiation skills. The knowledge, attitude, authority, and objectivity strategies lead to skill. Skills are based on knowledge gathered, attitude presented, authority exercised, and exhibited objectivity.

Negotiation Styles

In addition to developing negotiation skills contracting professionals must also understand negotiation styles.
Negotiation style categories involve accommodating, avoiding, collaborating, competing, and compromising (Terra, S. M., and Zimmerling, J., “Contracts and Contracting: A Primer,” Professional Case Management, 2016,21(5), 243–249). These categories can overlap to produce the best approach in negotiation. The style depends on those involved from both parties in the negotiation.

Negotiation Philosophy

Negotiation philosophy complements negotiation skills and style. It refers to the method by which healthcare professionals approach driven interaction with payers in determining payment terms. Often, negotiation philosophy is represented by two distinct approaches; reactive and proactive.

Healthcare contracting staff can approach health plan discussions with more confidence and knowledge if they understand five typical negotiating styles and when to use them. Certain negotiations may require using overlapping styles to produce positive results.

Reactive. A reactive philosophy is essentially accepting terms without intervention. Providers are sometimes given contracts by health plans with “take it or leave it” tactics and then need to prepare operations, reacting to the effects (Kurunthottical, R., “Strategies for Proactive Payer Contract  Negotiations,” Medical Economics, 2015 92(1), 24–25). Accepting terms as presented by health plans is often the result of providers perceiving little to no negotiation leverage.

 

Understanding 5 Negotiation Styles

Healthcare contracting staff can approach health plan discussions with more confidence and knowledge if they understand five typical negotiating styles and when to use them. Certain negotiations may require using overlapping styles to produce positive results.

Accommodating (I lose-you win). The focus of this style is to preserve relationships. It should be used when you are at fault, your position is weak, or you are unprepared. Make sure you know the consequences of conceding before you do so.

Avoiding (I lose-you lose). Use this style when the issue being negotiated is trivial or when the value of resolving the conflict outweighs the benefit. Set expectations by both parties when using this negotiation style.

Collaborating (I win-you win). This should be the primary negotiation style. It requires understanding the other party’s point of view and motivations. Note that this style requires more time and may not work with competitive negotiators.

Competing (I win-you lose). This style often is used when relationships are not critical and one you need to get action quickly. During negotiations, use clear language (e.g., “we must have”) rather than weaker language (e.g., “we would like”).

Compromising (I lose/win some-you lose/win some). In this negotiation style, both parties value fair and equal resolution. both parties can get fast results but it’s also possible to concede to certain terms too early without regard for all aspects of the negotiation.

 

Proactive negotiation. Proactive negotiation involves several activities to prepare providers for the negotiation stage to deter- mine payment terms. Collecting, analyzing, and having a thorough understanding of the following data prior to coming to the negotiation table can make a significant difference in negotiated terms.

  • A clear sense of current market trends
  • Hospital cost to deliver quality care
  • Business principles
  • Demonstrated efficiencies that reduce cost (Kurunthottical, 2015).
  • Aggregated service line data
  • Case-mix
  • Population demographics
  • Treatment preferences
  • Utilization data

Being proactive and coming to meetings with this data in hand provides leverage for hospitals to secure the best financial outcome for the healthcare provider (Terra & Zimmerling, 2016). To obtain most favorable contract rates, the proactive negotiation philosophy complements professional skill and style. Proactive contracting involves establishing several payment terms:

  • Ensure prompt payment and penalties for lack of compliance
  • Eliminate retroactive denials
  • Address precluding language of reducing inpatient stays from higher to lower paying service categories
  • Establish a reasonable appeal process
  • Define clean claims
  • Remove most favored nation clauses
  • Prohibit silent PPO arrangements
  • Include terms for outliers or technology driven cost increases
  • Establish ability to recover payment after termination
  • Remove unclear language
  • Preserve the ability to be paid for service when patient consent is granted (Cleverley, O., and Cleverley, J.O., Essentials of Health Care Finance. Eighth Edition, Jones & Bartlett Learning, 2018.)

Engaging in single year contracts or year-to-year versus two to three year with automatic renewals is also another recommended proactive approach.

Recommendations

Hospital profits are based on negotiated payment terms. Negotiators with substantial amounts of market intelligence and skill can achieve favorable outcomes with contract terms. Execution of market intelligence, such as benchmarking terms and utilization data, along with integration of creative thinking and applying negotiation skills can be powerful. However, an initial critical step in knowledge includes understanding the current value of existing contracts.

For example, hospitals should assess if current payment terms cover the cost of service delivery, what or if variation exists in health plan payment plans, and whether hospital peers have better payment arrangements. With the information gathered, hospitals can strategize different scenarios along with understanding the impact of each. After health plan meetings, providers should plan how to execute the knowledge gained with the payer and deter- mine minimal, target, and optimal payment term goals.

By instituting the philosophy, style, and skills best suited for the negotiation situation and payer, healthcare providers can step closer to obtaining the levels of payment necessary to survive.

Strategic Financial Planning and Cost Advantage

How hospitals can create cost advantage where product differentiation is not present

A challenge exists in finding accurate comparative data for bundled-payment arrangements, such as total hip replacement

Cost advantage is necessary when a business is perceived as providing the same products or services as its competitors. In the eyes of many major healthcare payers, hospital services are not perceived as differentiated and are viewed as equally substitutable. While some payers are beginning to introduce value propositions into their payment methodology, many of these plans are merely new ways to reduce payment levels to providers.

Assuming that cost advantage in hospitals will become increasingly important, the critical question is how can hospitals achieve it? In general, two major methodologies for identifying efficient levels of cost exist. First, industry experts can help assess and design the most efficient processes for providing services. Second, benchmarking can identify standards from best practice organizations. Comparative data and benchmarking against other firms is usually the basis for both approaches.

Cost per output assessment
Level of comparison Measurement of cost difficulty Measurement of output difficulty  

Recommended metrics

Facility Strong Challenged Cost per equivalent discharge
Encounter Challenged Strong Cost per MS-DRG or cost per ambulatory patient classification
Source: Cleverley & Associates. Used with permission.

Cost benchmarking dilemma

The cost benchmark is defined as the ratio of cost divided by output. This is a simple but very accurate picture of the desired goal, but the devil is in the details. Everyone acknowledges that cost and output must be measured in similar ways between com- pared organizations in the benchmark data and the firm that is comparing itself to that data.
For example, cost needs to be measured in the same way across the comparative data.

This leads to a simple but troublesome comparative data issue. There is confidence that the measure of total cost is measured in a similar manner across organizations because of the use of Generally Accepted Accounting Principles (GAAP). If one firm has a total cost of $200 million and another has a total cost of $400 million, there is a great deal of assurance that the $400 mil- lion firm is twice as costly as the $200 mil- lion firm. The dilemma arises when hospitals provide cost estimates of specific services such as a total hip replacement. As organizations move from facility-level costs to costs for providing specific products or services, greater degrees of cost allocation are required, which can be subjective.

When we examine the comparability of the output metric, the reverse finding is true. It is difficult to derive a facility-wide output metric that would be regarded as comparable. For example, adjusted patient discharges or adjusted patient days are widely recognized as flawed facility-wide metrics. We have advocated using Equivalent Discharges for the last five years as better measures of facility-wide performance because they are better predictors of both revenue and cost (Cleverley, W., “Time to Replace Adjusted Discharges,” hfm magazine, May 2014, and Cleverley, W., “Understanding Why Hospital Costs are Increasing: It Depends Upon the Metrics,” hfm magazine, December 2018). When the output is defined in specific terms, such as a total hip replacement or a specific CT scan, it becomes easier to compare. The catch-22 is that the greater the specificity in output, the less comparable the cost. However, the output becomes more comparable (see the exhibit, page 3).

Sources of comparative data

Having identified the framework for cost benchmarking, it is important to under- stand the sources for cost benchmarks and their relative advantages. In general, two major sources of cost benchmarking data are available — public and proprietary.

Several public sources are available from individual data firms and hospital association groups. The advantage to this type of data is that it is usually not expensive, and it is easily attainable.
It also has one other distinct advantage because it can often provide provider-specific comparisons. This is important if a firm is striving for cost advantage over a local competitive firm operating in the same market area.

The disadvantage of public data is the lack of control over data collection. The comparability of the data may be question- able either because costs were not measured and defined in the same way across all firms or there are questions regarding the similarity of the output being measured.

Proprietary databases for benchmarking costs rely on hospital specific data that is not publicly available. This data could come from organizations that collect data directly from individual hospitals and pool that data to provide reports to clients or members. Data could also be compiled by large healthcare systems and disseminated to the individual hospitals.

The advantage of proprietary data is that it provides better control of data collection to ensure both costs and outputs are measured and reported in a consistent manner across submitting entities. This can potentially make the comparison more reliable and actionable. The major disadvantage to proprietary data is that it will not be able to provide specific comparisons for hospitals that may be direct competitors. This can be problematic because ultimately the creation of a cost advantage is market specific. Healthcare executives are charged with providing services ordered by physicians at the highest level of quality and cost efficiency.

Case illustration of effective cost benchmarking

To illustrate effective cost benchmarking, we are borrowing from a situation encountered by many U.S. hospitals. Hospital A has been contacted by one of its larger payers requesting a proposal to provide a bundled payment solution for major joint procedures. The payer has informed them that they already have a proposal from hospital A’s primary competitor, hospital B. The hospital has been told that their competitor’s bid incorporates expected hospital payment of $12,000, which is the current Medicare payment for MS-DRG 470 — Major Joint Replacement or Reattachment of Lower Extremity w/o MCC. Hospital A wants to assess its own current cost position for MS-DRG 470 vis a vis that of hospital B.

Comparison of two hospitals’ MS-DRG 470 costs
Expense category
Hospital A ($)
Hospital B ($)
Variance ($)
Average LOS
2.16
1.93
0.23
Average routine LOS
2.13
1.87
0.26
Average ICU/CCU LOS
0.03
0.06
-0.03
Routine care
1,659.00
1,293.00
366.00
ICU/CCU
37.00
76.00
-39.00
Nursing total
1,696.00
1,369.00
327.00
Medical/surgical supplies
4,303.00
4,771.00
-468.00
Laboratory
75.00
46.00
29.00
Operating room
5,371.00
3,481.00
1,890.00
Radiology
227.00
76.00
151.00
MRI
0.00
2.00
-2.00
Pharmacy
1,308.00
575.00
733.00
Emergency department
42.00
32.00
10.00
Cardiology
12.00
23.00
-11.00
Blood
17.00
11.00
6.00
Physical/occupational therapy
540.00
374.00
166.00
Inhalation therapy
31.00
15.00
16.00
Other
17.00
11.00
6.00
Ancillary total
$11,943.00
$9,417.00
$2,526.00
Total cost
$13,639.00
$10,786.00
$2,853.00
Source: Cleverley & Associates. Used with permission.

The first step in being able to identify specific areas for cost reduction is to recognize the ultimate objective. The product in this case is a specific encounter of care, MS-DRG 470. Management’s task is to develop a production process that can generate high-quality encounters of care at efficient cost levels. While some policy advocates might say healthcare executives should be more concerned about the efficacy of what they produce (e.g., do we really need more hip replacements?), we believe those decisions are best left to physicians and policymakers. Healthcare executives are charged with providing services ordered by physicians at the highest level of quality and cost efficiency.
Cost per encounter can be expressed as the product of three key cost drivers:
> Intensity of services
> Productivity/efficiency
> Resource prices/salaries and wages

Intensity of services

Intensity of services is the mix and quantity of services that produce the encounter of care. For example, a five-day inpatient stay for pneumonia has five days of nursing care, a series of drugs, laboratory procedures and many ancillary services. There is often wide variation in the intensity of services across patients and across hospital providers.

While many intensity factors are physician driven, healthcare managers can play an instrumental role in explaining the relative costs associated with alternative treatment protocols. Lowering intensity of services for a defined encounter of care can lead to reductions in total cost per encounter — again, the primary goal if we are seeking cost advantage over competitors.

Selective physician cost comparisons for MS-DRG 470
Physician Average charges Average length of

stay

A $70,159 4.75
B $58,944 4.27
C $59,892 5.00
D $51,806 3.89
E $42,524 2.32
F $38,771 2.00
Source: Cleverley & Associates. Used with permission.

Productivity or efficiency

These are the costs incurred to produce a specific procedure that is part of an overall encounter of care. For example, what staffing mix and levels are used to produce a day of nursing care in specific nursing units? While intensity and productivity are related, they are different. To make the distinction, nursing intensity would involve the number of days involved in the patient stay. Nursing productivity would measure the number of hours nurses worked to provide one day of nursing care. Cost efficiency is usually associated with specific cost centers or departments, and we often refer to the cost per unit of service in that cost center. For example, cost per laboratory procedure is the departmental measure of efficiency in a lab. Lowering the unit costs of departmental products that comprise a patient encounter can reduce the total cost of the encounter.

Resource prices or salaries

As the price to hire staff or purchase supplies and drugs increases, the more expensive the encounter of care. For example, a hospital can minimize the length of stay associated with an inpatient encounter and it can also maintain low nurse staffing ratios, but if it pays salaries to nurses that are 25% higher than its peers, its overall costs may still be high.\

Cost assessment

The preliminary cost comparison of MS- DRG 470 between hospital A and hospital B shows a total cost variance of $2,853 (see exhibit left). The data used here is from 2017 Medicare Provider Analysis and Review (MEDPAR) files and 2017 Medicare Cost Reports — both widely available at minimal cost from multiple vendors. Two factors must be acknowledged. First, the data represent Medicare patients and not patients with commercial payers. There are few differences between Medicare costs and commercial payer costs for this MS- DRG. Second, the cost is determined by applying Medicare cost center ratios of cost to charges to revenue-center charges from the MEDPAR claims file. This is not as exact as detailed cost accounting from the hospital’s internal cost accounting system, but the validity can be easily assessed against the numbers reported here. The total hospital costs could be measured against internal estimates if available.

Reviewing hospital A’s initial profile suggests that there are three primary areas where its costs appear high relative to its competitor. First, nursing costs are $327 higher per case at hospital A than hospital B. Reviewing this variance tells us that $181 of the difference is related to a higher length of stay (LOS), 2.16 compared to 1.93. This value is derived by multiplying the cost per day ($1,696/2.16 or $785.19 times the LOS difference of .23 days). The remaining variance of $146 ($327 less $181) is attributed to a higher nursing cost per patient day, $785.19 at Hospital A compared to $709.33 ($1,369/1.93).

Second, operating room costs were $1,890 higher at hospital A than at hospital B. Using departmental costs for hospital A and hospital B taken from their 2017 Medicare Cost reports and applying estimates of equivalent units of procedures provided at both hospitals, we determined that hospital A’s OR cost per unit was 62% higher than hospital B’s and well above U.S. averages.

This finding is corroborated by the data in the MS-DRG 470 cost comparison, which shows costs are 64% higher at hospital A than hospital B, suggesting that the cost variance is exclusively related to higher unit costs not greater intensity. Finally, pharmacy costs are $733 higher at hospital A than hospital B. While this area is harder to assess than others, we did determine that on a cost per Equivalent Discharge basis, pharmacy costs were 74% higher at hospital A than hospital B and 70% above U.S. averages.

To close the loop on this assessment, hospital A can now review specific physician costs using their internal reporting systems to assess variances and determine if treatment protocols could be modified to reduce costs without impacting patient quality. In a cost comparison for six physicians, the most easily observable fact is the first four physicians have significantly higher LOS and cost relative to physicians E and F.

Further review also showed significantly higher supply costs because of implant selection and usage. Most likely, hospital A has higher costs relative to hospital B in many other areas. We found that the Cost per Equivalent Discharge was $8,998 at hospital A, which was 23% higher than the value at B. This difference is almost identical to the 26% difference in costs for MS-DRG 470.

Cost reduction actions

We believe that cost reduction will be the primary weapon for dealing with ever- tightening payments from major health- care payers. Revenue management can be helpful, but its effects are short-term and limited. Reductions in cost result from actions taken in two primary areas.

First, the utilization of services such as nursing days, lab tests and drugs can be reduced on a per-encounter basis. Second, the cost efficiency with which nursing care and other ancillary procedures are produced can be improved. The detailed charge code analysis presented in this paper can be a powerful tool to identify specific cost-reduction opportunities, which can lead to large and sustainable improvements.

CY22 OPPS Proposed Rule

A RESPONSE TO THE CY22 OPPS PROPOSED RULE (CMS-1753-P) FOR PROPOSED CHANGES TO REQUIREMENTS FOR HOSPITALS TO MAKE PUBLIC A LIST OF THEIR STANDARD CHARGES
Provided by: Cleverley + Associates

The CY22 OPPS Proposed Rule contains additional information and requirements regarding hospital price transparency. The proposed changes relate to current requirements found in CY 2020 OPPS Final Rule on Transparency (CMS-1717-F2).

CURRENT DISCLOSURE REQUIREMENTS SUMMARY:

As a continuation of the FY19 IPPS Final Rule, the CY20 OPPS Final Rule on Transparency introduced additional clarification and requirements for hospitals. These requirements became effective on January 1, 2021 and include the following key elements:

1) A definition of “hospital” that requires nearly all hospitals to comply with the rule,
2) Definitions for five types of “standard charges” to be disclosed by hospitals (gross charge, discounted cash price, payer specific negotiated charge, and the deidentified minimum and maximum negotiated charge)
3) A definition of hospital “items and services” that would include all items and services (including individual items, services, service packages, and employed professional fees) provided by the hospital to a patient in connection with an inpatient admission or an outpatient department visit;
4) Requirements for making public a machine-readable file that contains all definitions of standard charges for all items and services and service packages provided by the hospital;
5) Requirements for making certain standard charges public for select hospital-provided items and services that are “shoppable” and that are displayed in a consumer-friendly manner – either through a file or a web-based patient estimation tool;
6) Non-compliance monitoring, actions, civil monetary penalties, and appeal process.

The proposed rule contains four primary sections:

1) Proposal to Increase the Civil Monetary Penalty Using a Scaling Factor
Increase the amount of the penalties for noncompliance through the use of a proposed scaling factor based on hospital bed count
2) Proposal to Deem Certain State Forensic Hospitals as Having Met Requirements
Deem state forensic hospitals that meet certain requirements to be in compliance with the requirements of 45 CFR part 180
3) Proposals Prohibiting Additional Barriers to Accessing the Machine-Readable File Requirements to prohibit certain conduct that have been concluded to create barriers to accessing the standard charge information
4) Clarifications and Requests for Comment
Expected output of hospital online price estimator tools, and comment requests on a variety of issues being considered to improve standardization of the data disclosed by hospitals.

We now summarize the key areas above with feedback to be considered by hospitals in their comments to the CMS.

Summary: The CY20 OPPS Final Rule specified a penalty of up to $300 per day for noncompliance. This amounts to $109,500 for a noncomliant hospital for an entire year. Under the CY22 OPPS Proposed Rule, the minimum penalty remains $300 per day but would apply to small hospitals (bed count of 30 or fewer). For hospitals with more than 30 beds this would include a penalty of $10 per bed per day, maxing out at a daily penalty of $5,500 for hospitals with greater than 550 beds. This means, for a year of noncompliance, hospitals would be subject to a total penalty amount of $109,500 for a small hospital and a maximum penalty of $2,007,500 per hospital with greater than 550 beds.

Proposed Application of CMP Daily Amounts for Hospital Noncompliance for CMPs Assessed in CY 2022 and Subsequent Years

Clearly CMS is doubling down on its enforcement of the letter of the rule. However, this may change, as CMS is seeking comments on alternative or additional criteria that could be used to scale the penalty.
Other options include:

• Hospital Revenue
• The nature, scope, severity, and duration of noncompliance
• The hospital’s reason for noncompliance

Comment: Cleverley + Associates understands that the CMS is trying to facilitate greater compliance with the transparency requirements, however, as this is only the first year for reporting we believe it’s premature to increase CMPs at this time. We know that some hospitals have been delayed in getting information posted but are working toward compliance. We also believe that the CMS audit process with current CMPs may influence more hospitals to comply, as well, as we have seen hospitals that have received letters of noncompliance disclose required information thereafter. This would indicate that the current CMPs are working to encourage compliance without the need to increase. We also feel the significant increase in CMPs proposed is extreme at a time of continued financial and operational challenge with the ongoing pandemic. Should the CMS consider increasing CMPs, we believe the level of increase should be lower than proposed and should likely be phased in over time to allow hospitals to continue to understand how the audit and appeal process could work. The CMS should also specify which exact cost report field would be used for defining bed size if this continues to be considered for a scaled penalty approach. In sum, these requirements and reviews are new to both the CMS and hospitals which is why we believe more evaluation of compliance given the current requirements is necessary before changing the CMP structure is considered.

 

Summary: The CMS proposes expanding the list of exempt hospitals to include state forensic facilities. In review of impacted facilities, the CMS has found that such state forensic hospitals have specialized patient populations, are not open to the general public, and the rates for such hospital services are not negotiated. Therefore, they believe these facilities would not need to be subject to the disclosure requirements.

Comment: Cleverley + Associates agrees with the CMS assessment and fully supports this proposed action.

 

Summary: The CMS has observed that machine-readable files are often difficult to locate on a hospital website and sometimes challenging to download once found. As a result, the CMS is proposing two actions:

1) Seeking comment on the definition of “prominently displayed” that is currently in the rule to describe the machine-readable file’s location on the hospital’s website. Options the CMS is considering include requiring hospitals to use a CMS-specified URL or standardizing the location of the file from a link on the hospital’s homepage.
2) To address the issue of accessibility once located, the CMS is proposing to amend the regulations by specifying “that the hospital must ensure that the standard charge information is easily accessible, without barriers, including, but not limited to, ensuring the information is accessible to automated searches and direct file downloads through a link posted on a publicly available website.” The CMS intends this added language to “ensure greater accessibility to the machine-readable file and its contents and would prohibit practices we have encountered in our compliance reviews, such as lack of a link for downloading a single machine readable file, using “blocking codes” or CAPTCHA, and requiring the user to agreement to terms and conditions or submit other information prior to access.”

Comment: In our research into hospital compliance, we have experienced the issues the CMS has stated. We do also appreciate the flexibility the CMS has provided in where and how the information is presented on the hospital’s website as hospitals design the user experience they believe is best for their community. With this, we have the following comments:

1) “Prominently displayed” feedback – we have advised hospitals to make the file transparency disclosures available within two clicks from the hospital’s homepage. We believe this definition would provide clarity to expectations while still permitting the flexibility for the hospital’s web communication teams.
2) Proposed accessibility language feedback – we understand the need for direct access to the machine-readable files without barrier. We also understand that some hospitals have created some protections to direct downloads to safeguard the overall web-based hosting environment. Because the size of the machine-readable files can be quite large, repeated attempts to download this file from external sources can put pressure on the hospital’s network availability.

While these actions can be mitigated, it does present additional network considerations. We encourage hospital administrators to discuss this proposal with their IT teams and determine how concerns regarding this proposal should be communicated to the CMS given their specific network environment.

 

The CMS has provided clarifications and requests for comment in the following areas:

1) Clarification of the Price Estimator Tool Option and Request for Comment on Considerations for Future Price Estimator Tool Policies

Summary: The CMS has provided an option for hospitals to meet the consumer-friendly display of shoppable services through an online price estimator tool. In 180.60(a)(2), the CMS requires that the tool:
• Provides estimates for as many of the 70 CMS-specified shoppable services that are provided by the hospital, and as many additional hospital-selected shoppable services as is necessary for a combined total of at least 300 shoppable services.
• Allows healthcare consumers to, at the time they use the tool, obtain an estimate of the amount they will be obligated to pay the hospital for the shoppable service.
• Is prominently displayed on the hospital’s website and be accessible without charge and without having to register or establish a user account or password.

The CMS is seeking input in the following areas regarding the price estimator tool:

• What best practices should online price estimator tools be expected to incorporate?
• Are there common data elements that should be included in the online price estimator tool to improve functionality and consumer-friendliness?
• What technical barriers exist to providing patients with accurate real-time out-of-pocket estimates using an online price estimator tool? How could such technical barriers be addressed?

What best practices should online price estimator tools be expected to incorporate? Are there common data elements that should be included in the online price estimator tool to improve functionality and consumer-friendliness?

Comment: We believe that online price estimator tools should help patients understand the different ancillary services they may utilize in conjunction with the primary service they are using to conduct their search. This information is required for the static file view that the CMS described in the final rule on transparency and can be included through patient claim analysis. Patients can see the percentage of time other patients have utilized supporting services in their course of care and how those services translated to total claim payment.

In addition, although gross charges are not required, we believe the presentation of this information is helpful to show how charges are adjusted based on contractual agreements to bring the patient a lower payment amount. Patients often see a headline that hospital prices are “high” but are only seeing the

pre-discounted gross charge in the story. A presentation of this information would educate patients and would also connect the contents of the machine-readable file to the consumer shoppable tool. Most often, these gross charges dictate payment in lesser-of, outlier, or carveout provisions which are critical in determining what a typical claim payment would be for the primary service with usual supporting service provision, as well.

What technical barriers exist to providing patients with accurate real-time out-of-pocket estimates using an online price estimator tool? How could such technical barriers be addressed?

Comment: We are concerned about one clarification on the price estimator tool that would involve these technical barriers. The clarification reads:

 

Our concern is that the highlighted quote doesn’t appear in 84 FR 65578. There are two portions of this quote that are contained in separate sections, but this single quote combined with the “tailored” portion in the proposed rule can’t be found at 65578. Our main question is that the language above would seem to indicate that this exact quote is referenced on 65578 and is an original requirement of the price estimator. However, the requirement language is, as follows:

We considered the minimum necessary functionality requirements a price estimator tool must embody to satisfy this new policy. As reflected in the comments we received on this topic, we recognize that different hospitals may maintain different types of internet based healthcare cost price estimator tools, and that the market for, and technology behind, these applications is growing. Therefore, we believe it is important to ensure there is flexibility for the data elements, format, location and accessibility of a price estimator tool that would be considered to meet the requirements of 45 CFR 180.60. We believe that the requirements we are establishing in this final rule, for certain minimum data and functionality of a price estimator tool for purposes of meeting the requirements under new 45 CFR 180.60, are a starting point. We appreciate and will consider the commenters’ suggestions that we seek stakeholder input for future considerations related to the price estimator tool policies we are finalizing, including to identify best practices, common features, and solutions to overcoming common technical barriers.

Therefore, we are finalizing a modification to our proposed policy to specify in new 45 CFR 180.60(a)(2) that a hospital that maintains an internet based price estimator that meets certain criteria is deemed to have met our requirements at 45 CFR 180.60. The price estimator tool must:
• Allow healthcare consumers to, at the time they use the tool, obtain an estimate of the amount they will be obligated to pay the hospital for the shoppable service.
• Provide estimates for as many of the 70 CMS-specified shoppable services that are provided by the hospital, and as many additional hospital- selected shoppable services as is necessary for a combined total of at least 300 shoppable services.
• Is prominently displayed on the hospital’s website and be accessible without charge and without having to register or establish a user account or password.

To be clear, we believe that a price estimator tool would be considered internet-based if it is available on an internet website or through a mobile application. We considered the additional suggestions by commenters related to ensuring that price estimator tools are consumer- friendly. In our review of available online price estimator tools offered by hospitals, we observed that their look and feel are not uniform, so, in this final rule, and so as not to be overly proscriptive or restrict innovation, we are not at this time finalizing a specific definition of a consumer-

friendly format for price estimator tools or any additional criteria. However, we encourage hospitals to take note of current estimator tool best practices and seek to ensure the price estimator tools they offer are maximally consumer-friendly. For example, we encourage, but will not require in this final rule, that hospitals provide appropriate disclaimers in their price estimator tools, including acknowledging the limitation of the estimation and advising the user to consult, as applicable, with his or her health insurer to confirm individual payment responsibilities and remaining deductible balances. Similarly, we encourage, but do not require in this final rule, that hospital pricing tools include: (1) Notification of the availability of financial aid, payment plans, and assistance in enrolling for Medicaid or a state program, (2) an indicator for the quality of care in the healthcare setting, (3) and making the estimates available in languages other than English, such as Spanish and other languages that would meet the needs of the communities and populations the hospital serves. We note that although we decline to be more prescriptive at this time, we may in the future revisit our policy to deem hospital online price estimator tools as having met requirements if we determine such tools are not meeting our goals for making hospital charge information meaningful to consumers. We further note that a hospital that meets the requirements for offering an internet-based price estimator tool would still be required to make public all standard charges for all hospital items and services online in a comprehensive machine-readable format as discussed in section II.E of this final rule and finalized under 45 CFR 180.50.

Our concern is that the clarification section of the proposed rule implies that hospital charges MUST be connected in real-time to an individual’s insurance benefit information directly from the insurer for the patient estimation tool to be compliant. However, the transparency rule does not specify this but actually encourages creating a disclaimer about the estimate and advising patients to confirm this estimate with their insurer (see highlighted language above). Creating a real-time link with the insurer adds costs to the hospital to have to query for the patient’s plan and deductible position. There are fees associated for each and every query that occurs which can be quite costly considering how many different services a patient could be interested in evaluating in a web session. For this reason, some tools require the patient to enter their year-to-date plan information and then tie that to the specific payment amounts for their insurer. This allows the patient to receive an accurate estimate but does not levy per transaction fees for every web search conducted. We agree with the minimum requirements CMS has in the language but would have significant concern regarding the implications for this quote that we are not able to find in 84 FR 65578. We believe these transaction fees are an impediment to real-time out of pocket estimates for consumers.

2. Request for Comment on the Definition of ‘Plain Language’

In our effort to ensure hospital compliance with the use of ‘plain language,’ we seek public comment on whether we should require specific plain language standards, and, if so, what those plain language standards should be.

Comment: The American Medical Association offers Consumer Friendly Descriptors that can be used, under license, by CPT®. Absent this use, the CMS could create a reference library by HCPCS for hospitals and developers to use. We believe some standard would be useful so that the language would be consistent.

3. Request for Comment on Identifying and Highlighting Hospital Exemplars

Comment: We believe the CMS could begin this process by sharing case studies of hospitals that are achieving levels of transparency desired by the CMS. This case study sharing could be delivered through a Medicare Learning Network email or webinar. Prior to those case studies, we believe two elements could be useful.

First, at these early stages of disclosure development, it could be useful to create a forum to allow practitioners the opportunity to share logistically how they are assembling the information from disparate systems. Because there is some flexibility to assemble the disclosures to meet the compliance requirements, hospital administrators could benefit from learning of different compliant approaches and how the information provided can be assembled, formatted, and shared. Some of this dialogue is

occurring through professional organizations and consulting company webinars, however, to do this collaboratively with the CMS could greatly advance the overall compliance rate among hospitals and to provide more meaningful and standardized information.

Second, we believe the CMS could develop a set of standards or transparency objectives that would allow hospitals to understand how the CMS would be reviewing hospitals for current compliance and anticipated future objectives. These standards might help hospitals understand how to determine next steps in efforts. These standards could even result from the forums outlined in the first point. We believe collaboration among government and private stakeholders could help the dissemination of relevant information to patients within a framework of current and future environmental conditions.

4. Request for Comment on Improving Standardization of the Machine-Readable File

Summary: In the CY 2020 Hospital Price Transparency final rule, the CMS expressed “concern that lack of uniformity in the way that hospitals display their standard charges leaves the public unable to meaningfully use, understand, and compare standard charge information across hospitals (84 FR 65556).” While certain data elements were required, an exact file structure is not specifically prescribed. The CMS is now revisiting this to seek comment if and how greater standardization should be considered with the following points:

• What is the best practice for formatting data such as hospital standard charge data? Is there a specific data format that should be required to be used across all hospitals? Are there any barriers to requiring a specific format to be used by all hospitals when displaying standard charge information?
• Are there additional data elements that should be required for inclusion in the future in order to ensure standard charge data is comparable across hospitals? What one(s)? Is such data readily found in hospital systems? In what ways would inclusion of such data impact hospital burden?
• Are there any specific examples of hospital disclosures that represent best practice for meeting the requirements and goals of the CY 2020 Hospital Price Transparency final rule? We invite submissions of links to machine-readable files that the public would consider to represent a best practice.
• What other policies or incentives should CMS consider to improve standardization and comparability of these disclosures?
• What other policies should CMS consider to ensure the data posted by hospitals is accurate and complete, for example, ensuring that hospitals post all payer-specific negotiated charges for all payers and plans with which the hospital has a contract, as required by the regulations?

Comment: We agree with the CMS that there is not currently a way to meaningfully connect hospital machine-readable files as the file structure and specific data contents are not specifically prescribed. In our research, we have found four primary obstacles to creating a national database for hospital information that can be utilized for creating tools and resources for interested stakeholders to utilize. The four challenges and suggested solutions are, as follows:

1) CHALLENGE: Presence/Updates of information: the first challenge is locating and downloading files as some have forgotten to utilize the CMS required naming convention.

SOLUTION: we believe file access should improve once hospitals utilize the required CMS naming convention for the machine-readable file. We have also advised that the definition of “prominently displayed” should be considered within two clicks from the hospital or health system home page.

2) CHALLENGE: File Type & Layout Differences: standardizing the input files, once obtained, presents challenges as the file types (txt, xml, JSON, xlsx, etc.) and layouts (worksheets, columns, rows, etc.) vary significantly.

SOLUTION: we believe requiring the same file type and standardizing the file structure and defining the data elements will permit the creation of a national database. We propose a structure after challenge #4 below.

3) Relational Differences: hospitals have decided to report payer specific negotiated charges in a variety of ways: HCPCS, MSDRG, APC, per diems, case rates, charge codes. These different displays reflect the vastly different ways hospitals have structured their contracted rates and terms with payers. Beyond this, there are differences in what these elements represent (MSDRG base rate versus all charges, as example).

SOLUTION: we believe creating a standardized display for payer-specific negotiated charges is the only way to determine payment differences. We describe a method that is supported from the current transparency rule after challenge #4 below.

4) Payer Naming Differences: categorizing payers into appropriate comparison buckets presents challenges as there are no standard naming conventions.

SOLUTION: we believe items 2-4 above can be addressed by creating a uniform structure for reporting the required data in the following ways:

PROPOSED STANDARDIZED SINGLE MACHINE READABLE FILE
In a December 2019 CMS MLN call, it was stated that the single machine-readable file could have different sections (worksheets, tabs, etc.) but needed to contain all required elements. We propose having each section of required information separately defined to allow for uniform reporting and file consistency. We describe the sections below:

SECTION ONE: GROSS CHARGE INFORMATION – there is little confusion with how to extract and display the “GROSS CHARGE” information among hospitals. We propose six fields, as illustrated below in the “Gross Charge Display Example.” The primary comparison link for gross charges is CPT®/HCPCS, however, revenue codes can also be compared on a more manual basis through item descriptions, as well (useful for room rates and operating room associated codes, as primary examples).

SECTION ONE: GROSS CHARGE DISPLAY EXAMPLE

Code Code HCPCS Gross Charge Patient Type or Site of
Service Differentials
1234567 LEVEL 1 EMERGENCY CARE 450 99281 350.00 N/A
1234568 LEVEL 2 EMERGENCY CARE 450 99282 550.00 N/A
1234569 LEVEL 3 EMERGENCY CARE 450 99283 950.00 N/A
1234570 LEVEL 4 EMERGENCY CARE 450 99284 1,250.00 N/A
1234571 LEVEL 5 EMERGENCY CARE 450 99285 2,500.00 N/A

SECTION TWO: DISCOUNT CASH PRICE INFORMATION – not all hospitals have established their cash pay policies and prices in the same way. Some do not have these rates established at all, some have plans established to assist certain patients in varying financial classes or under certain circumstances, and others have established prices by code for any patient. In order to account for this variation while still permitting standardized reporting, we believe the “Discount cash price” section should have two options. These two options would capture text fields for those that have more “policy” driven structures and alpha-numeric fields for those that have established price lists. The two options are, as follows:
• Option One: POLICY – this would be a text field for an explanation of the hospital’s discount cash price policy, how it is applied, and contact information for financial assistance. This approach would allow hospitals without a single price list to still be able to communicate important information and resources for prospective cash pay patients.
• Option Two: PRICE LIST – for those hospitals with an established price list, information could be displayed in the same format as the Gross Charge display.

SECTION TWO: DISCOUNT CASH PRICE DISPLAY EXAMPLE – POLICY

Self-pay cash price discount is 30% of charge for all patients regardless of income level. The hospital also provides 100% charge
reduction for patients between 0-200% federal poverty level and 50% discounting for patients between 201-400% of federal poverty level. To understand discount cash pricing or to speak with a financial counselor, please contact 555-555-5555.

SECTION TWO: DISCOUNT CASH PRICE DISPLAY EXAMPLE – PRICE LIST
i

Code

HCPCS

Price

 

 

SECTION THREE: PAYER-SPECIFIC NEGOTIATED CHARGE – this is clearly the area that contributes to the lack of consistency and comparability within the files. The central reason for this is that there is an incredible amount of variability in how hospitals structure their contracted rates and terms with payers. Beyond this, there is a huge issue in mapping payers and plans from one hospital to those at another. Until there is standardization with these two areas there cannot be utility with this information. We believe there are three primary ways to address these issues:

1) STANDARDIZED PAYMENT – quite simply, unless all payers utilized the exact same payment methodologies there cannot be a way to evaluate payment differences. We cannot know how a per diem rate at one hospital compares with a MSDRG-based or percent-of-charge structure at another. Further, these contracts are typically much more complex and involve payment carveouts for certain areas, conditional hierarchies, outlier provisions, and charge lesser-of language, to name several key elements. In all cases, patient utilization is also essential to understanding payment. Higher resource intensity at one hospital with lower payment rates can lead to higher overall payment per patient encounter than a hospital with higher payment rates but lower resource intensity. Standardized payment rates and utilization must be considered in order to understand payment differences.

A standardized payer specific negotiated charge can be determined based on current resources and supported by current language from CY 2020 OPPS Final Rule on Transparency (CMS-1717-F2). The CMS has established payment systems for inpatient and outpatient claims that are utilized by all hospitals subject to the transparency reporting requirements. The solution to standardizing disparate payment systems is for hospitals to determine how the claim would be paid using the specific payer negotiated contractual language and then reported under Medicare-based grouping logic by MS- DRG (inpatient) or primary APC (outpatient). The steps to do this, are:
i. Derive expected claim payment for all items and services based by consulting the negotiated rates and terms with the specific payers. This would be done for all claims – not using historical reimbursement – but a calculation of payment using current payment terms and rates.
ii. Determine the MS-DRG (inpatient) or primary APC (outpatient) assignment for the particular patient claim. Grouper logic is quite common for hospitals and many already run every claim through Medicare logic to determine a MS-DRG assignment. Each claim would be labeled with a MS-DRG or primary APC designation (more on outpatient grouping later).
iii. Report the standardized payer specific negotiated charge by MS-DRG or APC for all required payers in a simple format illustrated below. This display would encompass all items and services and service packages and would also be representative of service utilization – the critical element needed to understand payment differences.

Support from CMS-1717-F2 – 65569
In this method, the hospital would “consult their rate sheets or rate tables within which the payer-specific negotiated charges are often found” – and – “display the individualized items and services and service packages for a specific payer’s plan based on the rate sheet derived from the hospital’s contract with the payer.”

In practice, the hospital would derive the payer specific negotiated charge by consulting their contracted rate sheets and terms and applying those to actual patient claims for the specific third-party payer. The display of this data would be in a unified inpatient and outpatient format and would allow “all items and services and service packages” to be displayed. Other potential formats would not be able to do this as patient utilization is essential in understanding payment. Without patient claim detail the hospital cannot satisfy the requirements of the rule because the number of combinations of items, services, and service packages is nearly limitless on a per patient basis. An expected derivation of service utilization is critical. This methodology provides the following benefits to fulfill the “payer specific negotiated charge” display requirement:

• Better understanding of total encounter payment as payment is most often related to actual service utilization – even in fixed fee arrangements
• All hospital items and services to be covered – including drugs and supplies
• Permits meaningful payment comparisons across payers and hospitals
• Custom contract definitions, payment hierarchies, and outlier/lesser-of status to be factored into payment calculations – these terms, conditions, and rates

involve criteria conditioning unique to individual payment encounters that must be “derived” to present relevant information
• In keeping with the rule’s language, as well as the intent to provide meaningful information to patients

Alternative Views
We believe this methodology solves issues that other alternative formats present. We briefly summarize other “standardized” formats for payer specific negotiated charges and inherent challenges in those views:

Detailed Rate/Term View: the CMS could request that each term and rate be provided for each payer in a consistent way (a field for percent of charge discount, per diem amount, base rate, etc.) – however – each of these fields (for which there would be an incredible amount – typical contracts have pages of terms, definitions, and rates) would then need to be further defined (does the discount of charges apply to all charges or only for certain codes, is the per diem medical, surgical, etc., what DRG version is being used and what are the weights). This information – even provided perfectly across all hospitals (again, not feasible given the vast variation) would then need to be applied to patient claim detail to create a payment comparison. As an example, payment would need to be calculated using patient claim detail in order to understand if hospital A (with percent of charge) had higher or lower payment than hospital B (with per diem rates). The methodology we propose does the very thing that would be necessary to understand these differences and does not overly burden the hospital to extract an immense amount of contract detail and benefits researchers and tool developers as the math for expected payment has already been calculated and presented consistently.

Other Derived Views: the CMS could utilize the methodology we’ve described but try to attribute payment to individual lines on patient claims and have reporting occur in a view similar to the Gross Charge Display. The primary challenge to this – and we recognize that some are promoting this – is that payment is not at a line level – it occurs at a claim level. So, these derived amounts would need to be applied to patient claim detail to determine relative payment positions. Again, the utilization of services on a patient claim is critical and these “line-level derivations” do not address that. Payment is made at the claim level by payers and should be presented that way.

A NOTE ABOUT THE OUTPATIENT GROUPING
The MS-DRG grouping is one that is very intuitive for most in our industry and an MS-DRG assignment is common for claims processing/grouping. The primary APC assignment is straight-forward but less utilized. Essentially, the primary APC would be the highest weighted CPT®/HCPCS code on the patient claim using the APC payment methodology. So, in the example above, if the 99283 code was highest weighted on the patient claim then that claim would be grouped/assigned to APC 5023 “Level 3 Type A ED Visits.” All other services on the claim (lab, imaging, etc.) would be considered secondary to the primary reason why the patient was at the hospital – for a level three ED visit. While MS-DRG groupers are quite common for
hospitals, this type of outpatient assignment should be intuitive and accessible given

Medicare payment methodologies.

If the CMS is hoping to create a way to evaluate payment differences, then two things are essential: 1) disparate payment methodologies must be presented in a standardized way and 2) utilization differences must be taken into account. Our proposed methodology does both and is supported by language from CMS-1717- F2.

2) STANDARDIZED PAYER MAPPING
Once payment has been standardized using the methodology described above, payers must be able to be compared through a common mapping. We believe the CMS could create a list of common national/regional payers that the hospital would link to in the disclosure file. This “National Payer Map” could be for the top twenty or thirty payers that would allow some mechanism to create comparisons and would likely cover a significant number of US hospital payment. Beyond this, the CMS could have a “plan map” that would list common types of plan structures (PPO, HMO, ALL, OTHER, etc.) to provide for the appropriate payer/plan linkages.

Examples of the “CMS National Payer Map” and “CMS National Plan Map” can be seen below in the Section Three example.

3) STANDARDIZED REPORTING STRUCTURE
Finally, this information could be presented in a simple, standardized format as illustrated below:

SECTION THREE: PAYER SPECIFIC NEGOTIATED CHARGE DISPLAY EXAMPLE – INPATIENT

MS-DRG
Description Hospital Payer Name CMS
National Payer Map CMS National Plan Map Payer Specific Negotiated
Charge
807 Vaginal Delivery Without Sterilization Or Blue Cross PPO Blue Cross PPO 9,530
D&C Without Cc/Mcc
807 Vaginal Delivery Without Sterilization Or Cigna PPO Cigna PPO 9,880
D&C Without Cc/Mcc
470 Major Hip And Knee Joint Replacement Blue Cross PPO Blue Cross PPO 30,200
Or Reattachment Of Lower Extremity
Without Mcc
470 Major Hip And Knee Joint Replacement Cigna PPO Cigna PPO 33,135
Or Reattachment Of Lower Extremity
Without Mcc

SECTION THREE: PAYER SPECIFIC NEGOTIATED CHARGE DISPLAY EXAMPLE – OUTPATIENT

APC
Description Hospital Payer Name CMS
National Payer Map CMS National Plan Map Payer Specific Negotiated
Charge
5023 Level 3 Type A ED Visits Blue Cross PPO Blue Cross PPO 934
5023 Level 3 Type A ED Visits Cigna PPO Cigna PPO 1,120
5102 Level 2 Strapping and Cast Application Blue Cross PPO Blue Cross PPO 947
5102 Level 2 Strapping and Cast Application Cigna PPO Cigna PPO 864

SECTION FOUR: DEIDENTIFIED MINIMUM/MAXIMUM PAYER-SPECIFIC NEGOTIATED CHARGE –
The benefit of using the structure identified in Section Three is that minimum/maximum values are very easy to present – and – to some extent become irrelevant given the standardized

MSDRG and primary APC reporting. A researcher could easily calculate minimum, maximum, and other statistical measures based on the standardized data format presented. Still, this information could be compiled, as follows:

SECTION FOUR: DEIDENTIFIED MINIMUM/MAXIMUM CHARGE DISPLAY EXAMPLE

807 Vaginal Delivery Without Sterilization Or D&C Without Cc/Mcc 8,200 12,775
5023 Level 3 Type A ED Visits 575 1,345

We believe that if the CMS seeks to standardize the Machine Readable File it should do so in a way that will meet current requirements while providing meaningful information. The structure we have proposed addresses these requirements and solves for the challenges that stakeholders are experiencing with current disclosed data.

We certainly support reasonable efforts to continue to help patients understand the financial implications of their care. However, we continue to be concerned that much of this additional disclosure information will go unutilized by patients. The CMS has held that this information will lead to reduced costs. However, it is interesting to note that one of the referenced sources in their rulemaking (Desai S, Hatfield LA, Hicks AL, et al. Association Between Availability of a Price Transparency Tool and Outpatient Spending. JAMA. 2016;315(17):1874-1881. Available at: https://jamanetwork.com/journals/jama/fullarticle/2518264) concludes the opposite, finding:

In this analysis, offering a health care services price transparency tool to employees was not associated with lower outpatient spending. This was also true in subanalyses focused on employees with higher health plan deductibles and those with comorbidities at baseline. Furthermore, those offered the price transparency tool did not shift their care from higher-priced HOPD settings to lower-priced ambulatory settings.

The same article also runs counter to other “benefits” the CMS believes will occur with increased reporting of the requirements:

A series of factors may underlie the lack of a negative association between offering the price transparency tool and outpatient spending. First, despite selecting 2 employers with the highest uptake and substantial marketing from the employers, use of the tool was relatively low, with only 10% of employees logging on in the first year of its introduction. Such low use rates have been reported for other price transparency tools. Moreover, low utilization is the most commonly reported challenge to price transparency initiatives by insurers who offer tools. Patients may not find the information compelling or may simply forget about the tool if they seek health care infrequently.

Second, there may be limited opportunities for patients to save money via the tool. Price shopping is most useful for care that is nonemergent and of lower cost, and there may be a limited set of services that meet those criteria. A recent report found that only 40% of spending is attributable to shoppable services. In this study, a substantial fraction of searches were for services whose prices exceeded the employee’s deductible, so that out-of-pocket amounts would be the same regardless of which clinician or hospital was chosen. Also, approximately half of employees met their deductible within the year.

After reaching their deductible, patients may have little incentive to price shop. Third, a common service through which patients could benefit from price shopping is clinician office visits. However, many patients have established relationships with their clinicians that they may wish to maintain regardless of price.

We hope that this information has been useful to summarize the proposed changes to the transparency requirements and comments for future requirements. Given these concerns, we highly encourage hospitals to submit feedback to the CMS within the comment window which ends on September 17, 2021 at 5pm EDT.

RESPONDING TO THE CMS
The following information provides direction from the OPPS proposed rule for commenting:

DATES: Comment Period: To be assured consideration, comments on this proposed rule must be received at one of the addresses provided in the ADDRESSES section no later than 5 p.m. EST on September 17, 2021.

ADDRESSES: In commenting, please refer to file code CMS-1753-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

Comments, including mass comment submissions, must be submitted in one of the following three ways (please choose only one of the ways listed):

1) Electronically. You may (and we encourage you to) submit electronic comments on this regulation to http://www.regulations.gov. Follow the instructions under the “Submit a comment” tab.

**Search for CMS-1753-P and select “Comment” from search results

2) By regular mail. You may mail written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS- 1753-P, P.O. Box 8010, Baltimore, MD 21244-1850.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3) By express or overnight mail. You may send written comments via express or overnight mail to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1753-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

b. For delivery in Baltimore, MD—Centers for Medicare & Medicaid Services, Department of Health and Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.

How to Use Contract Testing and Analysis to Prepare for Payment Changes

Testing and Analysis to Prepare for Payment Changes

Two areas that effect the impact of contract changes include how payers define categories and services and hierarchies of payment.

A substantial provider-payer contract is nearing the renewal period. The payer initiates proposed changes to current payment terms, but the provider already has in mind specific outcomes desired for the upcoming contract year. The provider is faced with two choices; accept and move forward with the proposed changes or engage in the negotiation process. What should the provider choose? To make an educated next step, it is critical to gain specific information. Whether the contract is new or up for renewal, a thorough understanding of the financial implications of changes to provider-payment terms is vital for continued operations. Critical steps in the process include identifying the sources for contract testing, the approaches to analysis and the payment impacts.

Payer proposes payment terms

One approach involves testing the terms and methodology proposed by the payer. Through analysis, the provider can determine if the offered terms result in alignment with the organization’s financial goals. This approach seems simple enough, but the following elements must be kept in mind.

Definitions. How the payer defines payer categories and services represents the first key consideration. The definition of each service must be communicated to the provider, so payer and provider are on the same page. For example, does the payer use a specific set of revenue codes, HCPCS codes or a combination to define an emergency visit? Confirming detailed definitions will ensure each service is identified accurately in the tests.

Hierarchy of payment. The service category deemed primary, secondary and soon is another significant consideration. Hierarchy of payment involves determining how the payer pays a claim when multiple services are present. For example, the claim represents a patient presenting in the emergency department, followed by a surgical service in the OR and concluding with the patient being placed under observation. In this scenario, how will the payer apply payment if the contract includes payment categories in all three of these areas? Results could be significantly different if
surgery groups are applied in the test, but the payer interprets that observation takes precedence in the hierarchy. Payment methodology. How the rate is applied is another consideration when testing proposed terms. For example, is the payer paying a service at a case-rate level, at the unit level or once per day? Application of a per unit methodology can produce vastly
different results than once-per-day payment methodology. if testing a proposal provided by the payer, the next step will be to apply the current contract terms to a set of claims. This will determine the base or benchmark payment. Next, apply the proposed terms to the same set of claims. Using the same set of claims in the base and test is critical to provide an apples-to-apples comparison of terms. From here, the impact of moving to the new terms proposed by the payer can be determined.

Payment methodology. How the rate is applied is another consideration when testing proposed terms. For example, is the payer paying a service at a case-rate level, at the unit level or once per day? Application of a per unit methodology can produce vastly different results than once-per-day payment methodology. If testing a proposal provided by the payer, the next step will be to apply the current contract terms to a set of claims. This will determine the base or benchmark payment. Next, apply the proposed terms to the same set of claims. Using the same set of claims in the base and test is critical to provide an apples-to-apples comparison of terms. From here, the impact of moving to the new terms proposed by the payer can be determined.

Why initiate contract testing?

Contract testing may originate from a variety of sources. Termination of contract. A provider could be faced with the termination of a contract and those patients could potentially leave the provider’s payer mix entirely. Or the contract moving out of network creates a shift of patient volume, for example a large employer group, to another payer contract with different payment terms. What will either adjustment mean to the provider’s net revenue?

Changes in legislation. Another foundation for contract testing involves the complications associated with changes in legislation. An example of this can be payment terms adjusting to include a
provision to cap contracted payment at federal program methodology, such as the Inpatient Prospective Payment System or Outpatient Prospective Payment System. Providers also ought to be equipped with payment analysis for an adoption or variation of the “Medicare for All” initiative. Can the organization survive under this movement?

Modification to current terms. Most commonly, the source for initiating contract testing and analysis starts from the payer or provider desiring to alter current payment terms. If either party wishes to modify the terms, the relationship has now entered into a level of contract negotiations. By using skilled resources to test changes, the provider increases the ability to validate any analysis estimated by the payer and develop counter scenarios to meet favorable objectives.

Bottom line, regardless of the cause, providers should ultimately want to prepare for the impact of payment changes. To accomplish full preparation or create a desired outcome, the various approaches to contract testing must be considered

What to test and how to test it?

Depending on the goals for finalized payment terms, the provider may approach the contract testing process in two general ways. Payer proposes payment terms. This approach involves testing the terms and methodology proposed by the payer. Through analysis, the provider can determine if the offered terms result in alignment with the organization’s financial goals. Provider desires specific outcome. This approach to contract testing is more complex than the payer proposal of payment terms. For example, a provider may have an idea of a desired outcome (e.g., an overall increase of 5% for the payer over the previous year). In this case, the provider determines the optimal contract terms to help reach this goal and then presents the terms to the payer.
Either approach could be enhanced by attaining payment-term intelligence involving benchmark data. Utilizing existing comparison data for payer-specific payment levels along with either
of the methods creates powerful information to assist with the testing and analysis process.
Regardless, with either approach, specific element details are crucial to understand prior to initiating testing.

Provider desires specific outcome

Another approach to contract testing is more complex. The provider may have an idea of a desired outcome (e.g., an overall increase of 5% for the payer over the previous year). In this situation, the provider may want to determine the optimal contract terms to help reach this goal and then present the terms to the payer. While the elements in the first approach are applicable here as well, additional key elements should be kept in mind for this approach.

Leverage. The first element is determining how much leverage the provider has with the payer. In some cases, the size of the hospital and payer may determine the negotiation ability of the provider. Knowing this up front can save time during the testing process.

Extent of changes. Another aspect is determining how much of the original contract the provider wants to change and the payer is willing to change. Any combination of changing the rates or the methodology and structure can be involved. It is important to know what parts and to what extent they can be tested as certain terms may already be deemed non-negotiable in the contract.
Establishing the base or benchmark payment is still needed under this approach. The testing phase of various terms based on the provider desiring a specific outcome may take longer, depending on the goals, as well as the elements, changing in the tests. Consider the following example. A provider’s current contract includes
a mix of fixed rates (e.g., per diems, case rates) and percent of billed charge payment. The goal is to increase overall payment for this contract by 5%. Constraints include limited flexibility to adjust only the fixed rates, and methodology must be kept the same. The provider must now determine the level of increase to the fixed rates necessary to achieve an overall 5% increase. A complication arises due to an inpatient stop-loss provision and a lesser of provision applied to inpatient and outpatient claims. Increasing the fixed rates will not only increase payment for some claims
but will also cause movement in and out of stop-loss and lesser of claim status, making the overall payment more unpredictable. With charge sensitivity involved, any future price increases to the chargemaster must be incorporated as well. Comparisons to the benchmark payment for each test will help determine the new rates that help reach the 5% increase goal. For either approach, a key challenge associated with contract testing is utilizing a comparable base of claims data. The data criteria used by the payer to estimate impact is often a pitfall when comparing
results as different claim date ranges may have been used for the analysis. A critical aspect of accurate testing is using the same criteria as the payer to define the data set involved, including covering seasonality. Once the proposed rate impact or new rates are formulated, it is time to communicate the results to the payer.

Communication of testing outcomes

After initial testing is complete, results of the contract changes should be available for quick identification of impact. A report providing the impact is a useful way
to communicate the results. Depending on the desired level of change the parties want to review, layout of the results can be displayed in a few ways. Several types of suggested views of results include:

  • Overall impact
  • Patient type impact (inpatient/outpatient)
  • MS-DRG impact
  • Service impact

Impact reports compliment the negotiation process by providing a tool to use with the payer to discuss outcomes and potential further testing. This is especially true when testing proposed rates provided by the payer. If the results are not at the level anticipated by the provider, presenting impact reports to the payer may aid in further negotiations until both parties are satisfied.
When developing contract terms to meet a desired goal, the provider also needs to communicate the new rates to the payer. Depending on what the payer requires, this can be accomplished by a summary letter or report of new terms presented with the impact reports. Including as much detail as possible about any changes made in the test ensures both parties are on the same page.
In addition to displaying the testing approach results, once again, benchmark data for payer-specific payment levels can significantly enrich the communication.

Next steps

Results are in, and now the provider needs to determine if additional testing is needed or if both parties are prepared to proceed. With the results information gathered and benchmark data for payer-specific payment levels in hand, providers may decide to continue strategizing other scenarios along with understanding the impact of each. Or the provider may determine the best
options are already available. By executing the knowledge gained through this process, providers are equipped to arrive at the table knowing minimal, target and optimal payment-term goals. In addition, this process may bring to light any elements of the payment terms requiring additional attention and resolution with the payer. After new terms are accepted by both parties, the provider must now prepare for the upcoming effects of executing the payment changes.

Mutual understanding

Once the provider and payer gain a mutual understanding of the goals and process of contract testing, both parties can move forward with more confidence. Arming themselves with the proper tools and knowledge to accomplish financial goals can ensure a smoother negotiation process and transition to new contract terms.

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Why Removing Percent-of-Charge Provisions in Managed Care Contracts Won’t Address Concerns about High Hospital Charges

Implementing fixed-fee provisions would not remove the factors that drive price increases, nor would it reduce administrative hassles or decrease risk.

Advocates of replacing percent-of-charge (POC) contract provisions with fixed-fee payments as a restraint on hospital costs overlook that hospitals wouldn’t be able to reduce their charges except in the unlikely event that fixed-fee payments exceed current POC payments.

• Implementing fixed-fee payment could make claims adjudication more difficult for reasons ranging from hospitals’ lack of access to fee schedules to difficulty in validating payment due to ambiguity in contract language.

• Fixed-fee payments reduce risk for payers — not providers — because if a provider ends up seeing patients who require a higher level of service, the provider likely will lose money.

• Indexed rate limits may be a viable solution for limiting price increases while maintaining financial stability for all parties.

 

Healthcare figures to be a primary issue in the 2020 elections, with much of the focus on costs — especially hospital costs. A common concern among users of hospital services
is the apparent lack of correlation between hospital charges and payment. Although some hospital managed care executives have suggested replacing percent-of-charge (POC) contract provisions with fixed-fee payment as a solution, these proposals are based on three myths regarding the POC payment methodology relative to fixed-fee payment. A closer look at each myth reveals that such a payment change could be problematic for the industry. A better solution is within reach, however: An indexed rate limit in POC contracts that would allow hospitals to lower charges without experiencing reductions in payments.

MYTH #1: REPLACING POC PROVISIONS WITH FIXED FEES WILL REMOVE THE NEED TO INCREASE PRICES

Many managed care executives believe that replacing POC provisions with fee schedules will enable them to lower their current prices or at least restrain price increases. But consider this
pricing formula:

pricing formula

As the formula shows, the required price that any hospital must set is based on several factors:

 1. Actual prices must be set at levels that exceed actual costs.

 2. Hospitals, like any business, must generate a profit margin to replace their physical assets and to service debt obligations.

 3. Losses on fixed-fee payment plans (stemming from fee schedules that are less than cost) must be shifted to patients who are covered by POC provisions. There would be a gain rather
than a loss if actual payment exceeded incurred cost, but that outcome is unlikely given the large losses that usually result from government payment plans.

 4. As POC volume shrinks, the resulting price must be increased. Let’s use a case example to help isolate the key factors. Assume we have a POC provision that makes payment for emergency department (ED) claims at 50% of billed charges, and we want to replace that provision with a fee schedule that pays $1,000 for levels 1 and 2 emergency claims, $1,600 for level 3 claims, $4,500 for level 4 claims and $6,000 for level 5 claims. Will this change permit us to reduce our ED charges?

The answer is yes, but only if the fixed-fee payments exceed the current POC payment. If the fee schedule payment is less than the POC payment, that loss would have to be shifted to the now smaller base of POC patients, which would result in a higher required price. Negotiating a fixed-fee replacement for a POC payment makes no sense financially unless there is a significant increase in payment. Managed care payers seem unlikely to agree to increase their payment beyond current levels, meaning a reduction in charges would be improbable.

Some might argue that removing the POC provision will help reduce patient responsibility amounts. Since collectability on those amounts is not likely to be 100%, this reduction could represent a financial advantage to the hospital.

Upon examination, however, this scenario is suspect. Using the ED example, assume current pricing for a level 1 claim is $2,000. At the current 50% payment provision, expected payment would be $1,000. If the claim includes a 20% copayment provision, the patient would pay $200 based on allowed charges of $1,000, and the managed care plan would pay $800. Meanwhile, moving from the POC payment to the $1,000 fixed payment for the level 1 emergency claim would still require a 20% copayment of $200.

Even though the initial payment change might be net revenue neutral, the longer-term effect figures to be an increase in the hospital’s prices. To understand this from a mathematical perspective, review the pricing formula again. Given recent trends, government payments can be expected to erode over time. Although some of the loss will be picked up by commercial fixed-fee payments, a sizable portion will not.

That shortfall will require an even larger shift to POC plans, resulting in even larger increases in prices. With fixed payment terms in place, and an income target that is essential to preserving
the financial viability of the institution, hospitals must either implement draconian cost reductions or increase prices to the smaller block of POC patients.

Empirical data indicates an association between lower percentages of POC payment and higher prices. We pulled data from about 300 hospitals in 2018. These were all prospective payment hospitals, with critical access hospitals and specialty hospitals excluded. We determined the percentage of revenue derived from POC contracts and then divided the hospitals into quartiles using that metric. Using 2018 Healthcare Cost Report Information System (HCRIS) data and 2017 Medicare claims data, we then computed the average values for three measures of pricing: mark-up ratios, average charge per Medicare discharge adjusted for case mix, and average charge per Medicare visit adjusted for ambulatory payment classification relative weight. Those values are presented in the exhibit above right. The key finding: hospitals with higher percentages of revenue derived from POC provisions have significantly lower markups and lower prices. The variances are substantial and amount to a 75% to 85% difference between the highest and lowest POC quartile.

A closer look at healthcare payment methods

To better understand the nature of the three myths, a short description of alternative payment methodologies is critical. The exhibit below presents a scheme for categorizing
payment plans by:

• Payment basis
• Unit of payment

Payment basis describes how a payer determines the amount to be paid for a specific healthcare claim. There are three payment bases:

• A cost-payment basis simply means that the underlying method for payment will be the provider’s cost, with the rules for determining cost specified in the contract between payer and provider. Cost payment arrangements are rare outside of Medicare payment for critical access hospitals.

• A fee-schedule basis means the actual payment will be predetermined and will be unrelated to the provider’s cost or its actual prices. Usually fee schedules are negotiated in advance with the
payer or are accepted as a condition of participation in programs such as Medicare and Medicaid.

• A price-related-payment basis means the provider will be paid based on some relationship to its total charges or price for services. For example, a payer may negotiate payment at 75% of billed
charges for all services or for selected areas such as outpatient procedures.

Unit of payment refers to methods of grouping the services provided to a patient:

• In a bundled services arrangement, services provided to a patient during a care encounter that are aggregated into one payment unit. For example, health plan contracts often pay for inpatient services on a per-day or per-DRG basis. Payment is fixed based on a negotiated fee schedule (e.g., $1,000 per day to cover all services provided) and is the same regardless of the
level of ancillary services provided. Higher degrees of bundling include payment for certain episodes of care or for a covered life in a capitated arrangement.

• In a specific services payment arrangement, the individual services provided to a patient during a care encounter are not aggregated. An example is a contract that pays for outpatient surgery based on a fee schedule for the surgery as well as separate payments for any imaging or lab procedures performed.

Healthcare payment methods

In many cases, health plan contracts have elements that appear in more than one category in the exhibit. For example, a contract may call for the hospital to be paid on a DRG basis but stipulate that for all claims in excess of $75,000 in billed charges, the payer will pay the claim at 80% of charges.

Unit of Payment Example

MYTH #2: FIXED-FEE ARRANGEMENTS WILL BE EASIER TO ADMINISTER THAN POC CONTRACTS

Another argument to support the replacement of POC contract provisions with fixed-fee arrangements is ease of adjudication. Some may argue that in POC contracts a payer may deny specific charges. However, payers can and do deny claims or portions of claims that are paid on a fee-schedule basis. Adjudication of claims with fixed-fee terms can be difficult for several reasons. First, anecdotal evidence indicates cases when hospitals lack the fee schedules used by payers to make payment. Either the payers have not updated and distributed new fee schedules or they do not make downloadable electronic files available to hospitals. In that scenario, the hospitals simply rely on the payer to make the appropriate payment.

Second, fixed-fee contracts often contain confusing language that makes validating payment difficult. One issue is a lack of definition for payment terms. For example, the contract may specify fee schedules for orthopedics or cardiology without expressly defining orthopedics or cardiology.

POC Impact Chart

A lack of a clearly defined hierarchy in payment is another issue in many fixed-fee contracts. For example, there may be specific case rates for emergency visits and surgery, but
the contract may not clearly define whether both are paid if a patient visits the ED and then has surgery, or whether only one is paid and, if so, which takes precedence. To make matters worse,
such claims may be adjudicated differently over time as managed care personnel change or a person’s interpretation changes. Payers have more leverage in these matters because they are the
ones holding payment.

The increased complexity in claims submission and adjudication has spawned an army of revenue cycle staff to deal with the administrative issues, which itself contributes to rising hospital costs. We examined levels of administrative and general (AG) expenses reported as a percentage of total operating expenses using HCRIS data from 2011 to 2018. In 2011, AG expenses accounted for 14.7% of total expenses. In 2018, that share had increased to 16.5%.

To put this in perspective, the average hospital in 2018 had total expenses of $268 million. If that hospital had maintained its 2011 AG expense percentage, it would have reduced expenses by
$4.9 million annually. While the increase in administrative costs cannot be attributed entirely to managed care contract complexity, a portion clearly is associated with the more complex claims administration that results from fixed-fee arrangements.

MYTH #3: FIXED-FEE ARRANGEMENTS WILL REDUCE RISK

Moving from a POC arrangement to a fixed-fee plan shifts the intensity of service risk from the payer to the provider. If the provider sees more patients who require higher levels of service, the
provider stands to lose money. Fixed-fee plans also shift the risk of rising resource prices for items such as drugs to the provider.

Moving to payment plans where the bundled unit is even more comprehensive than an encounter, such as with episodes of care or covered lives, shifts even more risk to the hospital. Taking on more risk is viable if the assumption of risk is accompanied with the possibility of greater return, but hospitals’ experiences with larger bundled payment options have been mixed.

Some have argued that the risk shift to hospitals will give them greater incentives to become more efficient in care delivery, but the devil is in the details. How can hospitals reduce their costs if they already are relatively efficient, and will additional cost reductions affect care quality?

The delivery of specific services for an encounter of care is most likely physician-directed and subject to minimal influence by management. Managed care plans argue that POC provisions provide strong incentives to overprescribe (e.g., do more tests) and to increase prices. Again, management does not order tests or create discharge orders; physicians do.

To some extent managed care payers are protected from large rate increases by rate limit clauses in POC contracts. Most often rate increases above a certain level, such as 5%, are neutralized. These provisions shift the risk of increases in resource prices to the hospital.

WHY RATE LIMIT CLAUSES ARE A POSSIBLE SOLUTION

Rate limit clauses — specifically indexed rate limit provisions — offer a potential solution to spiraling hospital prices. Indexed rate limits exist in a limited number of plans across the country and are easy to understand and administer.

Most rate limit clauses are on a “use it or lose it” basis. In an indexed arrangement, however, if the allowed rate of increase is not used, the POC
payment percentage increases.

As an illustration, assume that a contract pays 50% of billed charges and has a 4% rate increase limit. If the hospital chooses not to increase prices in a given year, the POC payment percentage would increase to 52%. This mechanism would maintain payment at the predetermined rate of increase for both provider and payer.

Instead of raising prices or freezing them, assume that the hospital rolls prices back by 20%. The new payment rate would be 65% [(1.04/0.80)X 50%]. A service currently priced at $100 would
be reduced to $80 but still be paid $52 ($80 x0.65), just as if the provider raised the price by 4%, to $104.

The key is getting all payers to agree to the inclusion of indexed rate limits. Without acceptance by all payers with negotiated contracts, those choosing not to adopt an indexed arrangement would have lower payments relative to other payers. Fixed-fee provisions may also need adjustment to remove “lesser than” provisions if prices are in fact reduced.

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